October 30, 2018
Credit Scoring Improvements
Credit card issuers want accurate ways to assess risk while opening credit lines to potential new customers. The credit scoring system they choose plays a huge role.
In recent years, both the VantageScore and Fair Isaac Corporation (FICO) systems have released newer versions expected to help consumers who are fiscally responsible but have little or no credit history to judge. The newest such scoring system, UltraFICO, is a joint effort from FICO, the credit reporting agency Experian, and the financial data sharing and management company Finicity.
The UltraFICO pilot program was announced at the October Money 20/20 USA conference in Las Vegas, with an expected launch date of early 2019.
What makes UltraFICO different? Like other scoring system improvements, it uses financial information that isn't normally reported to the credit reporting agencies. Unlike the other improvements, it focuses on banking activity and allows consumers to decide whether to make that information available to the scoring system.
However, as a pilot program, UltraFICO has limited use – and there's no guarantee UltraFICO will help your score when it does arrive.
Credit Versus Cash
Credit scoring systems use the information in your credit report to distill your creditworthiness to a single score. Your credit report contains a history of your credit and loan transactions, giving a total picture of how you have handled debt throughout your life. You can read your credit report for free within minutes by joining MoneyTips.
Information on payments that are regular obligations but don't involve debt – such as cable or internet/phone bills, utility bills, and rent – generally aren't recorded on your report.
Younger consumers with no credit history may pay all these obligations in full every time but be denied credit because these types of transactions aren't considered. Most credit scoring system improvements focus here, trying to find responsible consumers that have been shut out of the credit system.
Similarly, banking activity doesn't factor into traditional credit scores. Creditors don't care whether you have a dollar or a million dollars in your bank account, as long as you pay your debts. By analyzing your cash flow, balances, and overdraft activity, UltraFICO looks for non-credit-based evidence of fiscal responsibility to complement traditional scoring measures.
You Have Control
Alternative credit scoring systems may look to your monthly bill payments to assess risk, but they seek that information without your permission. (You don't control information in the other direction, either – you can't send copies of your paid cable receipts to credit reporting agencies and expect them to be included in your credit report.)
UltraFICO is unique in allowing consumers to control access to their banking data. If you're concerned that your checking and savings account data may hurt rather than help – or if you aren't comfortable sharing your banking information at all – you can choose to block that information.
The shared banking information will not include which merchants receive your payments or what you purchase – but there's no guarantee that won't change in the future.
Will UltraFICO Help You?
UltraFICO may be able to help your credit score if your banking information is positive – you have a history with a reasonable minimum balance, few if any overdrafts, and relatively stable cash flow. As reported in the San Francisco Chronicle, Sally Taylor-Shoff, a FICO scores vice-president, suggests that a consumer should have an average balance near $400 every month and avoid any negative account balances.
If you already have a good credit score, UltraFICO probably won't help – and it could theoretically hurt your score if your banking history has more blemishes than your credit history.
Of course, an UltraFICO score can only help you if a lender chooses to use it. As currently constructed, UltraFICO will be available only when lenders pull credit reports from Experian, excluding other credit reporting agencies. If 2019 represents the pilot stage, UltraFICO will likely take years to gain wide acceptance. You have plenty of time – and incentive – to improve your credit score using more conventional methods.
The Takeaway
The new UltraFICO credit score may be able to help you get credit, just like any of the newer scoring system variations. However, you don't have any control over which system a lender uses.
Do you want to guarantee a good credit score? Focus on activities that raise your score in any scoring system.
Start by making all of your credit card and loan payments on time – as well as all other payments. On-time payments are critical to a high credit score.
Keep your credit utilization – the amount of your credit in use relative to your credit limit – as low as possible. Balances should be below 30% of your limit, and 10% is preferred. That's true for individual accounts as well as overall limits.
Don't open any more credit accounts than you need, or close old unused accounts. Multiple credit requests suggest high risk to lenders, while closing old accounts shortens your length of credit history. It's better to keep old accounts active by placing small charges on them and paying the charges off regularly.
Stick with traditional credit-building activities. Maybe by the time UltraFICO is widely available, your credit score will be so good that you don't need UltraFICO to help.
You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
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